<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8979
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Ave, Ste. 900, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
The registrant has one class of common stock outstanding. As of May 10,
1996, 13,776,194 shares of registrant's $1 par value common stock
were outstanding.
1
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED MARCH 31, 1996
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 1996 and September 30, 1995 3
Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995 4
Consolidated Statements of Operations for the
six months ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
six months ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 18
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
March 31, September 30,
1996 1995
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $498 $1,771
Accounts receivable 420 440
Prepaid expenses and other 126 7
------------- -------------
Total current assets 1,044 2,218
Properties, net (Note 2) 19,044 12,777
Net assets of discontinued
operations (Note 7) 3,207 2,978
Other assets 359 425
------------- -------------
$23,654 $18,398
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $894 $355
Current portion of long-term debt 250 235
Accrued expenses and other (Note 3) 3,866 2,705
------------- -------------
Total current liabilities 5,010 3,295
Long-term debt, including $79,284 and
$78,284, respectively, payable to a
related party 82,980 82,213
Funding Agreement (Note 4) 9,111 1,148
Other liabilities, including $2,375 and
$2,367, respectively, payable to a related
party (Note 5) 4,004 5,106
------------- -------------
101,105 91,762
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000
shares authorized; shares issued and
outstanding: 13,578,250 and 13,423,378,
respectively 13,578 13,423
Additional paid-in capital 51,404 48,804
Accumulated deficit (142,433) (135,591)
------------- -------------
(77,451) (73,364)
------------- -------------
$23,654 $18,398
============= =============
The accompanying notes are an integral part of these financial statements.
3
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
March 31,
-----------------------------
1996 1995
------------- -------------
REVENUES
Sales and operating revenue $1 $2
Other income 69 1
------------- -------------
70 3
------------- -------------
COSTS AND EXPENSES
Operating costs 84 22
Depreciation and amortization 38 41
General and administrative 1,016 412
Exploration costs 846 --
Interest on indebtedness including $1,187 and
$1,135, respectively, to a related party 1,247 1,135
------------- -------------
3,231 1,610
------------- -------------
Loss from continuing operations
before income taxes (3,161) (1,607)
Income tax expense -- --
------------- -------------
Loss from continuing operations (3,161) (1,607)
Loss from discontinued operations (Note 7) -- (300)
------------- -------------
Net Loss ($3,161) ($1,907)
============= =============
Loss per share:
Continuing operations ($0.23) ($0.13)
Discontinued operations -- (0.02)
------------- -------------
Loss per share ($0.23) ($0.15)
============= =============
Weighted average common shares outstanding 13,573,750 13,039,776
The accompanying notes are an integral part of these financial statements.
4
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the six months ended
March 31,
-----------------------------
1996 1995
------------- -------------
REVENUES
Sales and operating revenue $1 $4
Other income 93 6
------------- -------------
94 10
------------- -------------
COSTS AND EXPENSES
Operating costs 89 6
Depreciation and amortization 76 83
General and administrative 2,676 801
Exploration costs 1,717 --
Interest on indebtedness including $1,131 and
$1,157, respectively, to a related party 2,378 2,292
------------- -------------
6,936 3,182
------------- -------------
Loss from continuing operations
before income taxes (6,842) (3,172)
Income tax expense -- --
------------- -------------
Loss from continuing operations (6,842) (3,172)
Loss from discontinued operations (Note 7) -- (300)
------------- -------------
Net Loss ($6,842) ($3,472)
============= =============
Loss per share:
Continuing operations ($0.50) ($0.25)
Discontinued operations -- (0.02)
------------- -------------
Loss per share ($0.50) ($0.27)
============= =============
Weighted average common shares outstanding 13,569,250 13,039,776
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the six months ended
March 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations ($6,842) ($3,172)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation and amortization 76 83
Interest capitalized (120) --
Accrued interest added to long-term debt (Note 5) 17 2,369
Accrued interest paid with common stock (Note 5) 2,367 --
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 20 157
Prepaid expenses and other (119) (308)
Other assets 9 1
Increase (decrease) in:
Accounts payable 195 14
Accrued expenses and other 1,554 57
Funding Agreement (Note 4) 2,429 --
Other liabilities (978) (305)
------------- -------------
Net cash used by continuing operations (1,392) (1,104)
Net cash used by discontinued operations (295) (227)
------------- -------------
Net cash used by operating activities (1,687) (1,331)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets -- 4,804
Capital expenditures (602) (21)
------------- -------------
Net cash provided (used) by investing activities (602) 4,783
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 1,000 675
Principal payments on long-term debt (235) (5,220)
Issuance of common stock 251 56
------------- -------------
Net cash provided (used) by financing activities 1,016 (4,489)
------------- -------------
Net decrease in cash and cash equivalents (1,273) (1,037)
Cash and cash equivalents at the beginning of the period 1,771 1,141
------------- -------------
Cash and cash equivalents at the end of the period $498 $104
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil & Gas Company
(hereinafter referred to as "Hondo Oil" or "the Company") include the
accounts of all subsidiaries, all of which are wholly-owned. All
significant intercompany transactions have been eliminated. The
Hondo Company owns approximately 75% of Hondo Oil's common stock.
Lonrho Plc, a publicly-traded English company, owns 75% of The Hondo
Company. Lonrho Plc increased its ownership of The Hondo Company
from 50% to 75% on January 5, 1996 and has options to acquire the
remaining 25% over the next three years.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. There has
not been any change in the Company's significant accounting policies
for the periods presented. There have not been any significant devel-
opments or changes in contingent liabilities and commitments since
September 30, 1995, including the contingency described in Note 7.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. The results for these interim periods are not
necessarily indicative of results for the entire year. These
statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1995.
(b) Earnings Per Share
------------------
Net income (loss) per share amounts are computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. The effect of common stock equivalents is not included
for periods with losses. Fully diluted per share amounts are the
same as primary per share amounts and, accordingly, are not presented.
(c) Income Taxes
------------
The Company uses the liability method to account for income taxes in
accordance with SFAS No. 109, "Accounting For Income Taxes." Deferred
tax assets and liabilities are determined based on reversals of
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted effective tax rates
and laws that will be in effect when the differences are expected to
reverse.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(c) Income Taxes (continued)
------------------------
The Company provides for income taxes in interim periods based on
estimated annual effective rates. The Company records current income
tax expense to the extent that federal, state or alternative minimum
tax is projected to be owed. The Company has investment tax credit
carryforwards of $1,299 which are accounted for by the flow-through
method.
2) Properties
----------
Properties, at cost, consist of the following:
March 31 September 30,
1996 1995
------------- -------------
(Unaudited)
Drilling in progress (Colombia) (a) $13,720 $11,775
Pipelines in progress (Colombia) 5,168 873
Other fixed assets 326 279
Accumulated depreciation (170) (150)
------------- -------------
$19,044 $12,777
============= =============
(a) As of March 31, 1996, drilling in progress represents the
Company's investment in oil and gas properties in Colombia.
This investment will be classified as a proved oil and gas
property when transportation and marketing arrangements are
concluded.
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(All Dollar Amounts in Thousands)
3) Accrued Expenses
----------------
Accrued expenses consist of the following:
March 31 September 30,
1996 1995
------------- -------------
(Unaudited)
Refining and marketing costs (Note 7) $2,048 $2,114
City of Long Beach 1,533 --
Drilling costs (Colombia) 94 190
Other 191 401
------------- -------------
$3,866 $2,705
============= =============
4) Funding Agreement
-----------------
Effective July 26, 1995, the Company's wholly-owned subsidiary, Hondo
Magdalena Oil & Gas Limited ("Hondo Magdalena"), Amoco Colombia
Petroleum Company ("Amoco Colombia"), and Opon Development Company
entered into a Funding Agreement for Tier I Development Project costs
(the "Funding Agreement") for the interim financing of costs
associated with the construction of a pipeline from the Opon Contract
area, for an approved geological and geophysical work program, and
for related overheads. The Funding Agreement provides that Hondo
Magdalena may repay the amounts financed by Amoco Colombia from prior
to the date of first production until 365 days thereafter, along with
an equity premium computed using a 22% annualized interest rate. The
equity premium is computed monthly on Hondo Magdalena's share of
expenditures (including any amounts to be recouped from Ecopetrol
after commerciality). Alternatively, from the date of first
production until 90 days thereafter, Hondo Magdalena may elect to
repay 125% of its share (excluding any amounts to be recouped from
Ecopetrol after commerciality) of the total costs accumulated up to
the date of repayment. If the financed amounts are not repaid within
365 days after the date of first production, an additional penalty of
100% of the amount then due would be recovered out of Hondo
Magdalena's revenues. Hondo Magdalena's revenues from production of
the first 80 million cubic feet of natural gas and related condensate
and natural gas liquids are pledged to secure its obligations under
the Funding Agreement.
Equity premiums of $411 and $57 related to the financed pipeline
costs have been capitalized for the six months ended March 31, 1996
and the year ended September 30, 1995, respectively.
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(All Dollar Amounts in Thousands)
4) Funding Agreement (continued)
-----------------------------
The Funding Agreement liability consists of the following:
March 31 September 30,
1996 1995
------------- -------------
(Unaudited)
Outstanding principal $8,499 $1,071
Equity Premiums 612 77
------------- -------------
$9,111 $1,148
============= =============
5) Other Liabilities
-----------------
In accordance with the terms of the Company's debts to Lonrho Plc,
accrued interest is either added to the outstanding principal or paid
by issuance of the Company's common stock on the interest due date,
at the option of Lonrho Plc. Accrued interest of $2,367 for the
six-month period ended September 30, 1995 was paid by the issuance of
121,372 shares of the Company's common stock on October 1, 1995.
Accrued interest of $2,375 for the six-month period ended March 31,
1996 was paid by the issuance of 197,944 shares of the Company's
common stock on April 1, 1996.
Other liabilities consist of the following:
March 31 September 30,
1996 1995
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc $2,375 $2,367
City of Long Beach -- 1,533
Deferred compensation contracts 671 671
Accrued pipeline and seismic costs 423 --
Other 535 535
------------- -------------
$4,004 $5,106
============= =============
6) Cash Flow Information
---------------------
Cash interest expense paid, all of which arises from discontinued
operations, was $119 and $127 for the six months ended March 31,
1996 and 1995, respectively.
10
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(All Dollar Amounts in Thousands)
7) Discontinued Operations
-----------------------
Effective March 31 and September 4, 1991, respectively, the Company
adopted plans of disposal for its refining and marketing and real
estate segments. On September 15, 1993, the Company executed an
agreement for the sale of substantially all of its refining and
marketing segment. The transaction closed on October 1, 1993.
Further proceeds are to be received when certain components of the
refinery equipment are sold by the buyer.
Operating losses of discontinued operations for the quarters ended
March 31, 1996 and 1995 were $114 and $94, respectively.
Corresponding amounts for the six-month periods were $229 and $208,
respectively, and were charged against loss provisions established in
earlier periods. The Company recorded a loss provision of $300 for
discontinued operations for the quarter ended March 31, 1995. No
other loss provisions were recorded in the subject periods.
In the agreement for the sale of the Fletcher refinery, the Company
indemnified the buyer as to liabilities in excess of $300 for certain
federal and state excise taxes arising from periods prior to the
sale. Fletcher notified the Company in July 1994 that an audit for
California Motor Vehicle Fuels Tax was underway and a preliminary
review by present Fletcher employees indicated that a significant
liability might exist. The Company retained a consultant to evaluate
the contingent liability. In September 1994, the Company accrued
$1,400 as a result of the consultant's evaluation. An additional
$650 was accrued in September 1995, primarily because of increases in
estimated amounts of penalties and interest which will be due. The
State of California's audit is still in process and could result in a
liability different from the amount accrued when concluded.
The balance of net assets of discontinued operations is comprised
solely of two parcels of land in the real estate segment. Changes in
this balance for the six months ended March 31, 1996 are as follows:
Balance as of September 30, 1995 $2,978
Valuation provisions recorded --
Valuation provisions used 229
-------------
Balance at March 31, 1996 (unaudited) $3,207
=============
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued
segments. The operating losses from discontinued operations for the
quarters ended March 31, 1996 and 1995 include interest expense of
$65 and $68, respectively. Corresponding amounts for the six-month
periods ended March 31, 1996 and 1995 were $131 and $137,
respectively.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
The Company's principal asset continues to be its interest in the Opon
Association Contract (the "Opon Contract"), an exploration concession
for an area in the Middle Magdalena Valley in Colombia, South America.
At the present time, the Company has no revenues from the Opon Contract
or other sources.
Opon Exploration
----------------
Hondo Magdalena Oil & Gas Limited ("Hondo Magdalena"), a wholly-owned
subsidiary, became involved in the Opon Contract through a farmout
agreement with Opon Development Company ("ODC") in 1991. In August
1993, Hondo Magdalena and ODC entered into a Farmout Agreement through
which Amoco Colombia Petroleum Company ("Amoco Colombia") earned a 60%
participating interest in the Opon Contract. To earn the interest,
Amoco Colombia paid $3.0 million in cash in 1993 and paid all of the
costs related to drilling the Opon No. 3 well in 1994. In addition,
Amoco Colombia paid Hondo Magdalena $5.0 million in October 1994 and
paid all but $2.0 million of Hondo Magdalena's costs for drilling the
Opon No. 4 well in 1995. Amoco Colombia, Hondo Magdalena and ODC have
interests in the Opon Contract of 60%, 30.88875% and 9.11125%,
respectively. Amoco Colombia is the operator.
The Opon No. 3 well, completed in September 1994, was drilled to a depth
of 12,710 feet at a total cost of approximately $30.0 million. The well
tested at a daily rate of 45 million cubic feet of natural gas and 2,000
barrels of condensate. The hydrocarbons were tested from 1,118 feet of
perforations in the La Paz formation through a 42/64-inch opening at the
surface with 6,000 pounds-per-square-inch flowing tubing pressure.
Downhole restrictions prevented the well from testing at higher rates.
The Opon No. 4 well, completed in September 1995, was drilled to a depth
of 11,500 feet at a total cost of approximately $28.5 million. The well
tested at a daily rate of 58 million cubic feet of natural gas and 1,900
barrels of condensate. The hydrocarbons were tested from 1,022 feet of
perforations in the La Paz formation through a 40/64-inch opening at the
surface with 8,121 pounds-per-square-inch flowing tubing pressure.
These two wells have confirmed the existence of a significant natural
gas field.
As reported in the Company's 1995 Annual Report on Form 10-K, the Opon
Contract provides for the reduction of the Opon Contract area by 50% at
the end of the exploration period, September 30, 1995. Two more acreage
relinquishments are scheduled at the end of two successive two-year
periods. A proposal relinquishing 50% of the area was accepted by
Empresa Colombiana de Petroleos ("Ecopetrol"), the Colombian national
oil company. Management believes that this reduction did not cause the
loss of significant exploration opportunities. Additional seismic
assessment of the Opon Contract area and the drilling of additional
wells will be necessary to evaluate the effects of further acreage
reductions.
12
As reported in the Company's 1995 Annual Report on Form 10-K, in July
1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol executed a
Memorandum of Understanding ("MOU") for the construction of a pipeline
and wellhead facilities and the sale of natural gas from the Opon
Contract area. Also as reported in the Company's 1995 Annual Report on
Form 10-K, the Colombian government formed the Comision de Regulacion de
Energia y Gas (Commission for the Regulation of Energy and Gas, "CREG"),
an agency of the Ministry of Mines and Energy, in 1995. CREG adopted
new regulations dealing with pricing and transportation of natural gas.
These regulations set a ceiling price for natural gas and a maximum rate
of return of 12.0% (after Colombian taxes, except for a 14% Remittance
Tax on foreign exchange returned to the United States) for pipeline
tariffs. The ceiling price has been interpreted to include costs or
fees for the processing of natural gas; therefore, processing costs
cannot be passed on to the buyer as contemplated in the MOU. Ecopetrol
has expressed an unwillingness to provide the terms outlined in the MOU
related to the buyer's payment of gas processing fees and the 13.2% rate
of return (after Colombian taxes) included in the pipeline tariff due to
these new regulations.
The parties to the MOU are now negotiating four fully-drawn contracts
for sale of natural gas, sale of liquid hydrocarbons, processing of
natural gas, and transportation through the planned pipeline to
Barrancabermeja. The parties are seeking, through the terms of the new
contracts, to achieve an arrangement that is an economic equivalent to
the terms of the MOU within the constraints of the new CREG regulations.
The natural gas sales and liquids sales contracts are nearly complete.
None of the contracts will become effective until all four are completed
and signed as they are interdependent. There can be no assurance that
the contracts will be completed to fulfill the original intentions of
the parties to the MOU.
Preliminary work for the pipeline began in late 1994. Amoco Colombia is
continuing with activities related to the construction of the pipeline.
Amoco Colombia is prepared to award a contract for the construction of
the pipeline, but has not done so as of this date. Completion of
construction of the pipeline is forecast in the fourth quarter of
calendar 1996. Completion of Ecopetrol's improvements to the El Centro
gas processing plant may delay commencement of production.
Ecopetrol has the right to acquire a 50% interest in a commercial field
after commerciality is declared and will reimburse the associate parties
for 50% of the direct exploration costs out of Ecopetrol's share of
production. In response to an application for commerciality, on May 14,
1996, Amoco Colombia received approval from Ecopetrol of a commercial
field of 2,500 acres that includes the Opon No. 3 and No. 4 wells. The
commercial field is substantially smaller than that requested in the
application. The commercial field may be enlarged by future drilling
and/or additional technical information, and additional fields may be
established. Ecopetrol will not pay for its share of expenditures to
enlarge the commercial field, or establish new fields, until the new
fields are proven successful and declared commercial. However,
Ecopetrol will participate in further development costs of the existing
commercial field. As described above and in the Company's 1995 Annual
Report on Form 10-K, Ecopetrol agreed in the MOU to reimburse in cash
13
certain costs related to the construction of the pipeline and wellhead
facilities.
The Opon No. 6 well has been proposed by Amoco Colombia as the next well
on the Opon Contract area. This well to the La Paz formation will be
located to the north of Opon Nos. 3 and 4 wells and is intended to
confirm the existence of the natural gas reservoir in this area. The
Opon No. 6 well will be located outside the commercial area described
above. Amoco Colombia has also proposed an exploratory oil well in the
southern portion of the contract area. Commencement of this well is
contingent upon analysis of seismic information recently acquired over
the subject area.
Amoco Colombia submitted a budget to Hondo Magdalena and ODC for
calendar 1996 on April 10, 1996. In addition to continuation of the
seismic data acquisition program and pipeline and wellhead facility
construction programs begun in 1995, the new budget calls for drilling
of the Opon No. 6 well, to begin in the third quarter of 1996 and,
possibly, drilling of an oil exploratory well to begin in the fourth
quarter of 1996, contingent upon review of newly-acquired seismic data.
Disputes over the amount of overhead and the allocation of overhead to
individual projects have arisen and have not been unresolved at this
time.
The results of the Opon No. 3 and Opon No. 4 wells have confirmed the
existence of a significant natural gas field in the Opon Contract area.
The Company must resolve the issues related to bringing the discovered
gas to market.
Corporate Activities
--------------------
The Company relocated its principal offices to Houston, Texas during
March 1996 to facilitate its relationships with Amoco Colombia, the
international oil and gas community in general, and travel to Colombia.
As reported in the Company's Current Report on Form 8-K dated January
18, 1996, and Proxy Statement dated January 29, 1996, Lonrho Plc,
together with certain of its subsidiaries completed a transaction on
January 5, 1996, through which Lonrho Plc and those subsidiaries now
control The Hondo Company, which, in turn, owns approximately 74.8% of
the issued and outstanding common stock of and controls the Company.
Prior to the transaction, control of the Company was effectively shared
by a Lonrho subsidiary with Robert O. Anderson and his sons.
Discontinued Operations
-----------------------
Two of the Company's former business segments, refining and marketing
operations and real estate operations were discontinued in 1991. No
change in the status of these operations from that reported in the
Company's 1995 Annual Report on Form 10-K occurred in the current
period.
14
Other
-----
As more fully described in Item 5 of the Company's 1995 Annual Report on
Form 10-K, because of continuing losses and decreases in shareholders'
equity, the Company does not fully meet all of the guidelines of the
American Stock Exchange for continued listing of its shares. Management
has kept the Exchange fully informed regarding the Company's present
status and future plans. Although the Company does not or may not meet
all of the guidelines, to date, the American Stock Exchange has chosen
to allow the Company's shares to remain listed. However, no assurances
can be given that the Company's shares will remain listed on the
Exchange in the future.
RESULTS OF OPERATIONS
Quarters ended March 31, 1996 and 1995
--------------------------------------
Results of continuing operations for the quarter ended March 31, 1996
amounted to a net loss of $3.2 million, or 23 cents per share. The
Company reported a net loss from continuing operations of $1.6 million,
or 13 cents per share, for the quarter ended March 31, 1995. Results
for the quarter ended March 31, 1995 also included a discontinued loss
provision of $0.3 million, or 2 cents per share.
The losses for the quarters ended March 31, 1996 and 1995 include $1.7
million and $1.5 million, respectively, for corporate general and
administrative expense and corporate interest expense. The loss for the
current period also includes the Company's share of operating, general
and administrative and exploration expenses of $0.1 million, $0.5
million and $0.8 million, respectively, related to the Opon Contract.
Similar expenses in the quarter ended March 31, 1995 were borne by Amoco
Colombia in accordance with the terms of the August 1993 Farmout
Agreement.
Six months ended March 31, 1996 and 1995
----------------------------------------
Results of continuing operations for the six months ended March 31, 1996
amounted to a net loss of $6.8 million, or 50 cents per share. The
Company reported a net loss from continuing operations of $3.2 million,
or 25 cents per share, for the six months ended March 31, 1995. Results
for the six months ended March 31, 1995 also included a discontinued
loss provision of $0.3 million, or 2 cents per share.
The losses for the six months ended March 31, 1996 and 1995 include $3.3
million and $3.1 million, respectively, for corporate general and
administrative expense and corporate interest expense. The loss for the
current six-month period also includes the Company's share of operating,
general and administrative and exploration expenses of $0.1 million,
$1.8 million and $1.7 million, respectively, related to the Opon
Contract. Similar expenses for the six months ended March 31, 1995 were
borne by Amoco Colombia in accordance with the terms of the August 1993
Farmout Agreement.
15
Management expects losses from continuing operations to continue until
revenue generation in Colombia commences, which is expected to occur no
earlier than the spring of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 1996 cash inflows of $1.0 million
and $0.2 million arose from borrowings from Lonrho Plc under existing
loan agreements and the issuance of common stock as a result of the
exercise of stock options, respectively. The Company utilized cash of
$1.4 million and $0.3 million to finance continuing and discontinued
operations, respectively, and made scheduled debt repayments of $0.2
million. In addition, the Company contributed $0.6 million towards its
share of costs incurred in Colombia during the six month period. At
March 31, 1996, the Company had cash balances of $0.5 million.
In December 1993, the Company restructured the terms of its debts to
Lonrho Plc. The revised terms included reduction of interest rates to a
fixed rate of 6% and provisions allowing the Company to offer payment of
future interest in shares of its common stock, and allowing Lonrho Plc
to either accept such payment in kind or add the amount of the interest
due to principal. The ability to pay interest in kind or capitalize
interest allows the Company to service its debt while cash resources are
scarce.
In October 1994, the Company received $4.8 million, net of withholding
taxes, from Amoco Colombia in accordance with the Farmout Agreement.
Also in October 1994, the Company paid $5.0 million to Lonrho Plc to
reduce the balance of outstanding loans from Lonrho Plc, and future
interest expense. At the same time, Lonrho Plc made available $5.0
million in the form of a facility loan that may be drawn as needed by
the Company. This facility loan was used in April 1995 to fund Hondo
Magdalena's $2.0 million contribution to the costs of drilling the Opon
No. 4 well and to finance other business activities. As of March 31,
1996, $0.8 million of the facility loan is available for future draws.
In December 1995, the Company obtained extensions of the maturity of its
debts to Lonrho Plc. The maturity of all loans from Lonrho Plc was
extended from not earlier than October 1, 1996 to not earlier than
October 1, 1997.
As reported in the Company's 1995 Annual Report on Form 10-K, on May 5,
1995, Hondo Magdalena, ODC and Amoco Colombia entered into a Funding
Agreement for Tier I Development Project costs (the "Funding Agreement")
for the interim financing of costs associated with the construction of a
pipeline from the Opon Contract area and certain other costs related to
the Opon Contract. The Funding Agreement became effective on July 26,
1995 with the execution of the MOU. Hondo Magdalena may finance its
share of the costs (including overhead) for the pipeline and a
geological and geophysical work program for up to 365 days after the
date that production from the Opon Contract area begins. The Funding
Agreement provides that Hondo Magdalena may repay the amounts financed
from prior to the date of first production until 365 days thereafter,
along with an equity premium computed on a 22% annualized interest rate.
16
The equity premium will be computed monthly on Hondo Magdalena's share
of expenditures (including any amounts to be later recouped from
Ecopetrol after commerciality). Alternatively, from the date of first
production until 90 days thereafter, Hondo Magdalena may elect to repay
125% of its share (excluding any amounts to be later recouped from
Ecopetrol after commerciality) of the total costs accumulated up to the
date of repayment. If the financed amounts are not repaid within 365
days after the date of first production, an additional penalty of 100%
of the amount then due would be recovered out of Hondo Magdalena's
revenues. Hondo Magdalena's revenues from production of the first 80
million cubic feet of natural gas and corresponding condensate and
natural gas liquids are pledged to secure its obligations under the
Funding Agreement.
In May 1996, the Company obtained a verbal commitment from Lonrho Plc
for an additional facility loan of $13.5 million. The terms of this new
loan are being negotiated.
Based upon the Company's present projections and other available
information, management believes existing cash, available facilities
including Lonrho's May 1996 commitment, and the Funding Agreement will
be sufficient to finance the Company's known obligations (the pipeline
and related facilities, the seismic data acquisition program, wells to
be drilled in 1996, overhead obligations unrelated to capital projects
and other business activities) through December 1996. However,
management believes the Company will need additional cash to complete
drilling of the wells that have been proposed and scheduled to begin in
1996 and to participate in the continued development of the Opon project
beyond 1996. If the Company becomes obligated for the drilling of
additional wells beyond those planned for 1996, or other capital
projects, the Company has the option not to participate in some or all
of the capital projects. In management's view, use of this election
would be a last resort to preserve the Company's existing interest in
the Opon Contract area because substantial penalties would be incurred
by not participating.
Cash from operations is not expected to be a source of funds until the
Opon Project begins commercial production. Management has continued
discussions with financial institutions regarding financing of the
Company's future obligations for the Opon project. Management presently
believes that permanent financing may not be forthcoming until the
economic uncertainties surrounding the Company's ability to bring
natural gas to market are resolved. While the Company will continue to
seek permanent financing in the near-term, there can be no assurance
that the Opon Project will be successfully developed or that additional
debt or equity funds will become available.
17
PART II
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-K are incorporated
by reference. Refer to Exhibit Index below.
(b) One report on Form 8-K was filed during the quarter ended March
31, 1996:
1) Form 8-K filed January 18, 1996 reported a change in control of
the Company from The Hondo Company to Lonrho Plc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date: May 15, 1996 /s/ Stanton J. Urquhart
_________________ _______________________
Stanton J. Urquhart
Vice President and
Controller
The above officer of the registrant has signed this report as its duly
authorized representative and as its chief accounting officer.
EXHIBIT INDEX
Exhibit
Number Subject
_______ __________________________________
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Hondo Oil & Gas
Company's Form 10-Q for the period identified
below. This information is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 498
<SECURITIES> 0
<RECEIVABLES> 420
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,044
<PP&E> 19,044
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,654
<CURRENT-LIABILITIES> 5,010
<BONDS> 82,980
0
0
<COMMON> 13,578
<OTHER-SE> (91,029)
<TOTAL-LIABILITY-AND-EQUITY> 23,654
<SALES> 1
<TOTAL-REVENUES> 94
<CGS> 0
<TOTAL-COSTS> 89
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,378
<INCOME-PRETAX> (6,842)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,842)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,842)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
